The Social Structure of a National Securities Market

Abstract

In this article, a national securities market-the stock options market-is characterized as a social structure represented by the networks of actors who traded options on the floor of a major securities exchange. Trading among actors exhibited distinct social structural patterns that dramatically affected the direction and magnitude of option price volatility. The argument that this market is socially structured is constructed in four parts: behavioral assumptions about the nature of economic actors, models of micronetworks, models of macronetworks, and price consequences. In the ideal-typical model of the market, actors are assumed to be hyperrational and never to act opportunistically. With these behavioral assumptions, the micronetworks of actors should be expansive, a condition which would result in undifferentiated and homogeneous macronetworks. Such macronetworks would tend to reduce the volatility of option prices. But in the empirical market studied here, actors are subject to bounded rationality and some act opportunistically. Because of these behavioral constraints, actors' micronetworks are restrictive. In large markets, restrictive micronetworks generate well-differentiated macronetworks; both large size and differentiation impede communication among actors, a fact which results in exacerbated option price volatility. In Small markets,restrictive micronetworks generate less differentiated market are conductive to efficient communication which results in dampened option price volatility. The findings are discussed in relation to some major premises in microeconomic theory, and some consequent implications for public policy are presented.